(What the government should be doing in the interim, medium term and long term).
I have just been laughing at the charade going on in the House of Representative probe, with different parties saying different things. This Government enjoys deluding itself. Just like all the other probes that have gone on before. After talking over a glass of juice and exchanging Ghana must go. The story ends. This article describes what a serious government should be doing on the interim, medium term and long term.
(What the government should be doing in the interim, medium term and long term).
I have just been laughing at the charade going on in the House of Representative probe, with different parties saying different things. This Government enjoys deluding itself. Just like all the other probes that have gone on before. After talking over a glass of juice and exchanging Ghana must go. The story ends. This article describes what a serious government should be doing on the interim, medium term and long term.
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On the interim (1-2years): Reform the Administration of Subsidy
It is clear that the administration of subsidy is enmeshed in corruption; this is because the administration of subsidy is shrouded in secrecy, thus rather than operate as a business it operates more like a cult. It is a well known fact that the oil sector is the best kept secret; in fact the Nigerian Defence Establishment does not come close to the NNPC on Nigeria’s Secrecy Index. The leader of Trade Union Congress described the PPPRA, the subsidiary of the NNPC in charge of subsidy administration as “the more you look, the less you see” A business that is wrapped up in secrecy would definitely breed unmitigated corruption, inefficiency and wastage. To put an end to this, the govt should shine the light of transparency, probity and openness. The Nigerian people deserve to know to the minutest detail what and how their commonwealth is spent and managed. To this end, govt. should take the following steps
1) Ensure that the allocation that goes to the PPRA goes through the scrutiny of the normal budgetary process. Before now the allocation that goes to the NNPC and its subsidiaries were extra-budgetary.
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2) A team of International Independent Forensic Auditors, Energy Economists and Market Intelligence
Experts etc from neutral countries. This is because if such a sensitive job is given to audit companies in countries who have great vested interest in oil, then it will be a foregone conclusion that the exercise would be compromised as they would definitely exonerate their interest from any wrong-doing. Nigerian audit firms should also not be involved because as rightly observed by Mr. Adams Oshiomole, Governor of Edo State and Peter Esele, President of TUC ‘most of them (audit firms in Nigeria) connive with the Independent marketers to sign for cargoes of oil shipment which they never saw”. Nordic and Scandinavian countries have consistently maintained such neutrality and companies from these countries should be invited to:
a. Carry out a comprehensive and thorough audit of the PPRA and NNPC over the past decade, with a view to ascertain to what extent the Nigerian State has been defrauded and by whom. Of course the terms and condition of their services must include that their report be made public.
b. Ascertain in actual terms how much crude oil is lifted from this country daily, and the percentage that goes unreported and how such fraud is perpetuated.
c. Ascertain and determine how much fuel and other petroleum products Nigeria consumes daily and forecast how much Nigeria would be consuming over the next 5 years given changes in demographic, structural and economic dynamics.
d. Ascertain the average cost of refining a barrel of crude abroad.
e. Identify the cheapest and closest countries to Nigeria, to refine crude-oil.
f. Ascertain the cost, feasibility and viability of mini-refineries relative to the importation of refined products.
The answers to most of these questions which before hand have been conjectural would aid the government and policy-makers to take the best set of strategic solution on the interim.
3) Prosecute and jail every person fingered in defrauding the nation, while also carrying out a massive recovery drive from such persons. This will boost the confidence of intending investors as they would begin to see the oil industry not as a closed cult of kleptomaniacs but one that is being opened up. The confidence of the masses which is currently in the negative region would skyrocket as they begin to perceive that govt is dealing with issues honestly.
4) Purge the PPRA and ensure that only honest professionals work there. Dedicate an independent and specialized team to effectively monitor and oversee the subsidy administration. Independent monthly or quarterly probe/audit must be made into the affairs/operation of the administration of subsidy. This will serve as twin checks and balances and would deter would-be corrupt officials, as they would now constantly be in the public eye.
5) Beef up security along the country’s territorial waters, it borders etc. To this end, an elite team of the Nigerian Army, Navy and Air force be deployed to ensure that crude oil and refined products are not diverted to other countries. Drones could even be purchased to aid this drive; the drones would check the menace of miscreants such as the Boko Haram and also stop bunkering.
All of these actions would help identify and block wastage, loopholes and free more cash, if the government is still in need of cash after this is done it should reduce expenditure on itself by 70 per cent. All over the world the reigning song is small government, big business.
Restructure the Nigerian Economy
In the medium term (2-3 yrs). The government should embark on a sweeping restructuring by massively investing in productive infrastructure. Those basic indivisibilities such as efficient and effective transportation network, electricity, efficient, professional and highly equipped security forces etc that make investment worthwhile should be provided. Market actors are rational and they take their capital to climates that have supporting regulatory and infrastructural base. In Europe and Developed countries, market actors respond swiftly to policy announcements. However in developing countries, Africa in particular, market actors scarcely move a limb to policy announcements because most often than not, most announcements are never followed through with any strategic and sensible action. In essence market actors move and respond only when sensible actions that encourage and justify the move of capital have been taken. Thus if government wants to attract investors to build refineries in the country it must positively restructure the economy and pursue relentlessly and vigorously a coordinated investment in infrastructure. By so doing it would stimulate market actors and investors to act. In doing this government could call a round-table of intending investors to ascertain priority infrastructure and the various region in which they would want to locate their investment and begin a massive and coordinated restructuring in those areas to start with. As noted earlier it was government’s fulfillment of its obligation to the “provision of security, electricity, transportation, port and communications facilities and other essential services” that engendered the building of the first refinery by Shell BP in 1965.
Restructuring the economy through massive infrastructural development also engenders investment and expansion in other sectors (not just the oil and gas sector) of the economy, thereby bringing growth, employment and increased revenue in form of taxes.
It is worthy to note that mapping a long-term strategic infrastructural development plan and following through with it encourages and boosts the confidence of the markets and guarantees sustained inflow of capital.
Long Term (5-6 yrs): Divest its Holding in the NNPC and its Subsidiaries
Successive governments have found it impossible no matter how hard it tried not to meddle in the affairs of the NNPC and this has hampered independence and professionalism, efficiency and growth in the Corporation. Mr. Esele the TUC President had this to say " How can the NNPC work when if a Minister wants to travel it’s the NNPC he goes to, if he needs a pillowcase it’s the NNPC that pays for it...is that what the NNPC was meant for". He was underscoring the fact that the Corporation had now become a bazaar of freebies for politicians rather than a business entity.
The NNPC since its inception hardly ever made profit at any point in time despite huge capital allocations and subventions given to it by the government. Meanwhile other multinational oil companies saw their profits consistently soar and received 30-40 per cent return on capital. Although the Petroleum Industry Bill has some good parts, it still has the NNPC and its subsidiaries in the scheme of things. This is problematic in my opinion, the NNPC has gone through all sorts of restructuring and reform in the past 41 years and is still a failed corporation, attempting to revive it with the government still having controlling stake is akin to attempting to get a fish to live on a tree. Historically, government’s long-term intervention in business has never succeeded for so many reasons stated earlier.
As I noted earlier on, the government does not only subsidize the downstream sector, it does so for the upstream also. This is because the NNPC does not have the full expertise to exploit crude on its own and so it is forced to go into joint ventures with bigger and more experienced international oil companies. Under such arrangement the Government underwrites most of the cost of the venture (as at 2006, the Federation through NNPC held an average of 57 per cent stake in upstream joint venture operation) through a cash call mechanism. The cash call is where the NNPC calls cash from the Federal Govt for exploitation, the amount it calls is usually what its joint venture partner gives it which is most often inflated. This arrangement was not supposed to last forever as the NNPC was supposed to gain self-sufficiency in exploitation over the years. To this end the Petroleum Technology Development Fund PTDF was set up in 1973 to train and equip indigenous manpower with the requisite technology. The Fund wasn’t as successful as expected for two reasons. Firstly many of the students or scholars sent abroad never returned home. And most of those who did return home and sought to work in the NNPC found that position which they were supposed to occupy had being politically awarded to technically inept people, while others found it more attractive and fulfilling to work with International Oil Companies. Secondly, the PTDF was not involved in any serious Research and Development (R&D) drive. It mainly funded training and skill acquisition. Thus while students were training abroad in a particular technology, International Oil Companies were heavily investing in researching and developing more sophisticated and advanced technology which were kept out of the reach of the mainstream and other competitors. So students who returned home and managed to get jobs with the
NNPC or indigenous oil companies suddenly found out that the skills and technology just gained were obsolete.
Thus govt had to constantly rely and partner with International Oil Companies who had the expertise and up-to-date skills on the very risky, tricky and technical business of exploration. And as such IOCs exploited this situation for their profit as they made it a custom to inflate the cost apportioned to the government. And the govt, who had no business doing business but had committed itself to doing the business it knew little or nothing about, had to pay whatever cost was apportioned to her. No doubt the NNPC top shots also joined in this fraud to enrich their pockets. A World Bank report put the total cost demanded as cash call by the NNPC in I994 at US$267million per month! A very staggering amount indeed and government has been able to pay such insane amounts and even much more consistently without any public outcry because NNPC allocations are extra-budgetary (i.e. they do not go through the normal scrutiny of the budget) and are kept out of the purview of the general public.
After 41 years of government’s intervention in the oil business with very minimal success, the case for government to divest all of its holdings in the oil sector and return back to pre- 1971 arrangement is very compelling. Of course this might imply the country’s exit from OPEC which should turn out to be a blessing in disguise as this will avail the nation a right of action and enable it manipulate and use the oil as a foreign policy weapon independently. Divesting its holdings will definitely free the government from the unwarranted burden it has placed on itself for 4 decades and engender competition. Unlike many other privatization programmes, government must ensure that it makes this one transparent. To this end the government should not be involved in valuing her assets as top government functionaries in concert with other cronies have perpetually undervalued government asset so as purchase it themselves at a cheap price.
An independent and reputable international agency from a neutral country should be called upon to value the government assets in the oil sector. The National Assembly and the general public should be carried along so as to avoid the kind of policy reversals being carried out right now by the National Assembly on the previous privatization programmes because of its dubious and non transparent manner. The Federal Government should also ensure that it pays off every single staff of the Corporation to the letter no matter how huge the amount (if it has wasted so much in the past 41yrs it can bear to rid itself of future burdens by paying off all the staff) is so as to allow for the smooth running of the process.
To ensure that the participation in the Oil Sector contributes to the Economy and foster all-round participation. Govt can take the following steps
• Make a law that makes it mandatory for IOCs to be incorporated in Nigeria and also to be listed on the Nigerian Stock Exchange, retain and re-invest 60-70 per cent of their earnings in Nigeria and domiciling their accounts with Nigerian Banks
• Encourage competent and professional indigenous players with structured low interest loans
• Ensure that indigenous oil companies have a robust R&D programme; research and development is critical to innovation, technological advancement and greater efficiency which gives a competitive edge. A situation where indigenous companies complain of stiff competition from IOCs due to technology disparities to gain govt money and sympathy should not be condoned. Indigenous companies must evolve their own technology to beat competition. Government should, on its own part, invest heavily in the education and research sector of the country so that it would meet up to the challenges of the day.
• Implement and pursue an appropriate tax regime. The case for increased royalty payment per barrel of crude relative to income tax levied on oil extraction makes sense. This closes the loopholes in the tax collection process because unlike the tax based on oil income which are more difficult to control due to the fact that companies inflate the expenses they deduct from their income in order to lower the tax payable, government can easily track how much oil is being extracted and what the royalty payments should be, based on the current price of oil.
To ensure compliance and standards government can take the following steps.
• Set up an independent regulatory agency made up of seasoned Energy Economists, Statisticians, forensic Auditors and Market Intelligence Experts who would among other things would, set and enforce production quotas based on market trends/dynamics and geo-political imperative, carry out oversight functions, take action against moves and mergers not in the overall interest of market (enforce anti-trust laws), conduct routine audits into the affairs of oil companies and punish severely fraud, scrutinize oil companies’ financials and formulate policy for the oil and gas sector.
• Set up an independent and specialized agency that formulates best environmental practices for the oil sector and invests in it powers to enforce, fine and punish defaulters.
• Make a law that makes it mandatory for oil companies to make public its financial and accounting operations and practices, and makes it a punishable offence to withhold or hide vital information about the above.
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